Over the past year, public trust in financial institutions has not weakened during the coronavirus (COVID-19) crisis. By contrast, trust in other key players in the Dutch economy and society has not emerged unscathed from the crisis.Read more
Price differentiation by type of mortgage has increased
Since mid-2015, the interest rate on mortgage loans provided by banks depends on the type of mortgage loan (see Figure 1). Until early 2015, there was hardly any difference between interest rates on interest-only and annuity-based mortgage loans. It increased rapidly since then, to stand at 40 basis points by the end of 2016. Recently it fell back again to 14-20 basis points.
The higher interest rate on interest-only mortgages can be partly explained by the longer maturity of this type of loan: since annuity-based mortgage loans are repaid in monthly installments, their (average) maturity is shorter in practice. However, this cannot explain why differentiation occurs only from 2015 onwards. But changing competitive conditions can. The share of non-banking providers in the mortgage loan market started to increase in 2015, boosting competition and squeezing mortgage loan margins. Non-bank providers mostly entered the annuity-based mortgage loan market, resulting in additional pressure on the margin for this type of mortgage loan. Moreover, competition in the interest-only loan segment is less fierce since this market mostly serves existing borrowers for whom switching to a new loan provider is more difficult than renewing their loan with their existing loan provider. The fact that margins on interest-only mortgage loans decrease again after 2018 may be linked to the decreasing stigma on this type of loan on the one hand and the increased attractiveness of this type of loan resulting from low interest rates on the other.
High margins on high-LTV loans
Banks have been taking the loan-to-value (LTV) into account in their mortgage loan pricing since 2013 (see Figure 2). The LTV is the ratio of the size of the loan to the value of the house for which the loan is granted. The higher the LTV, the higher the interest rate. As a result, the margin for banks on loans with a high LTV is higher than that on low-LTV loans.